There is a ‘Slow-Moving Tug-of-War' Between Employers and Remote Workers

In most cities in the U.S., employers are still struggling to convince workers it’s time to go back to the office. That is continuing to depress demand for office space, according to the VTS Office Demand Index (VODI) July 2023 quarterly report.

VTS, a technology platform that provides real-time CRE market information, claims VODI is the earliest available indicator of upcoming office leasing activity and the only one to track new tenant demand.

“Nationally, demand for office space fell 15.9% quarter-over-quarter to a VODI of 53 from 63 in March 2023, and 15.9% annually,” the company reported. And even though a drop in the summer months is normal, this drop was exceptionally large – well above the 0.9% in 2018 or 4.5% in 2019 and 2020.

“A VODI of 53 indicates that new demand for office space was flowing in at 53% of its average level in 2018-2019, i.e. just over half of the pre-pandemic normal,” the report noted. “At 53, the June VODI exceeds 7 of the past 12 monthly readings.”

While some employers “are full steam ahead, capitalizing on more favorable lease terms,” those who are hesitant to make commitments right now are dominating the market, VTS found. Over the past year, the VODI has remained within a relatively narrow range from 46-64. “The VODI’s latest level extends a prolonged stretch of relative stability, suggesting convergence to a post-pandemic state.”

Employers’ efforts to order or entice workers back to the office has given rise to “a slow-moving tug of war” between the two sides, VTS noted. It cites data indicating that nationally about one-third of workdays are worked off-site. On an anecdotal basis, the TAMI sector (technology, advertising, media and information sectors) appeared to favor remote work more than the FIRE (finance, insurance, real estate, and legal) or government sectors.

VTS noted two significant exceptions to the general trend. San Francisco experienced a 10.2% quarter-over-quarter and 5.9% annual growth in office demand, with an increase in the number of prospective new tenants hunting for spaces of more than 50,000 SF. 

And in New York, the VODI was down only 3.9% for the quarter, nearly flat – even though year-over-year, its VODI rose 7.4% — the most of any VODI market. “New York City has experienced a heightened influx of new prospective tenants seeking large spaces,” the report noted, adding that the disproportionately large size of the city’s office market exerts “outsized influence” on the national VODI. Los Angeles saw only a modest VODI quarterly decline. 

However, Chicago, Seattle, Washington, DC and Boston experienced significant fall-offs in demand. In Q2, the average VODI for these cities was 32.4% lower than for the three more office-friendly cities – and 17.5% higher than the rate for the previous quarter.

“As we continue to discover how the Post-Pandemic plays out, it remains to be seen how different sectors’ market use will evolve,” the report commented.